First Step on the 9th: 10.7 Trillion 'Jeungan Fund'... How Much Will It Stabilize the Stock Market?

[Asia Economy Reporter Ji-hwan Park] The government’s 10.7 trillion won Securities Market Stabilization Fund, established to stabilize the domestic stock market, will be fully operational starting on the 9th. In the market, there are mixed expectations about whether the fund’s injection will stabilize the stock market, which has seen increased volatility due to the novel coronavirus disease (COVID-19), alongside concerns that its scale relative to market capitalization is too small to have a significant effect.

According to the financial investment industry on the 6th, this stabilization fund was created by pooling 10 trillion won from the five major financial holding companies and 18 financial firms, and 760 billion won from related institutions such as the Korea Exchange, the Korea Securities Depository, and Korea Securities Finance. The first injection is expected to be 3 trillion won, which is 30% of the 10 trillion won raised by the financial holding companies, and 220 billion won, which is 30% of the related institutions’ investment. Some of the related institutions’ investments have already begun to be managed.

A financial regulatory official explained, "Specific operational plans such as fund execution and injection periods will be decided by the Investment Management Committee, which is scheduled to be launched soon, based on market conditions," and added, "Detailed progress after the Securities Market Stabilization Fund business agreement (MOU) among related institutions on the 31st is being carried out mainly by participating financial companies."

The first phase of the fund will be executed through a 'Capital Call' method, where funds are gathered into a master fund and then disbursed through sub-funds for each investor. The 3 trillion won raised in the first phase will be managed by Korea Investment Management, which has weekly operational experience with pension fund investment pools. The second and third capital calls will be decided by the Investment Management Committee, which plans to be formed next week.

The investment targets of the fund are not individual stocks but products representing the entire stock market. Investments will be made in market-representative index products such as the KOSPI 200 and KOSDAQ 150, with approximately 90% and 10% allocations respectively, and the injected funds are likely to be locked in for one year without withdrawal. The operational method is expected to involve purchasing in installments when the stock market falls below certain index levels. However, since the KOSPI has been gradually stabilizing recently, there is a high possibility that the stabilization fund may not be deployed if there is no significant decline. Additionally, considering the potential to encourage copycat trading by individual investors, the timing of the fund’s execution will not be disclosed separately.

There are also criticisms that the fund’s scale may not be sufficient to have a significant effect. Yong-taek Jung, head of the IBK Investment & Securities Research Center, said, "A 10 trillion won stabilization fund alone will not have a large effect on stabilizing actual stock market supply and demand." The size of this fund is about 0.9% of the KOSPI market capitalization (1,212.7141 trillion won).

However, there is also a strong view that the original policy goals are achievable. The fund is designed more to stabilize the market by reducing the extent of price declines rather than changing the overall market trend.

Soyeon Park, a researcher at Korea Investment & Securities, stated, "Due to the recent disappearance of buyers, trading has become shallow, causing significant price drops, and the stabilization fund will be a great help in buffering this effect."